by Matt B

Payday loans are short term loans offered to consumers who need cash fast. In most cases, you apply online, or in person at an office and discuss the terms of the loan. Usually, they will lend $400-$800 for a term of 2 weeks (most pay periods are 2 weeks). The interest on this short term loan will be 15-40%. For example, if you borrow $500 for 2 weeks at 30% the total cost to you will be $150. Pretty steep if you ask me. The APR (annual percentage rate) on this 2 week loan converts to 780%!!!

These businesses prey on the uneducated. People figure that this quick fix will help them with their financial woes, but in most cases it’s like putting a band-aid on a bullet wound. Paying these astronomical fees for a short term loan will not help in the long term, it will have the opposite effect. The loan originator makes it so easy to get the loan, most borrowers do not even read the terms. They blindly hand over a post dated check for the total of the loan + interest. If not paid on time, the loan originator takes the check to the bank to verify funds in the account. If the check is deposited and bounces, this will create even more fees for the borrower. It is then when the loan originator becomes a “bounty hunter” of sorts. They are responsible for recovering the money due. If the loan does eventually go to a collection agency, beware!! It is widely known that collectors for payday loan companies tend to be more aggressive than conventional collectors due to their usually “higher risk” clientele.

In many states, payday loans by any name (cash advances, fast money loans) are illegal. There are currently 13 U.S. states where these companies are not allowed to operate. I commend the government of these states for passing legislation prohibiting business practices like theirs. In most states where payday loans are legal, heavy legislation guides their practices. At any given time, there are countless lawsuits against these businesses for not being up front enough with rates and predatory lending practices.

Some argue that payday loans are a necessity for low income households. Tom Lehman, an advocate of unfettered payday lending claims that since these households have little or no access to credit and no financial institution will take the risk, these businesses are necessary. I could not disagree more. Like many outspoken opponents of payday loans, I am of the mindset that loans to riskier consumers who have trouble repaying them causes a debt cycle in which the borrower is constantly having to renew the term of the loan and paying fees each time it is renewed. It often takes months for the borrower to repay the principal of the loan.

There are other ways to get a quick buck that will cost you far less in fees. You can ask a friend or family member to borrow a few hundred dollars, you can get a second job. You can practice thrift and start saving more. It is just not necessary to borrow at such high rates for a temporary fix.

If you patronize payday loan services, I feel for you. Always know that there are thousands of other options for you and that what you are doing is poor for your financial health. Education sometimes starts by learning something the hard way. The people who take something away from this and remember will improve their situation. The people who breeze over it, or just ignore it completely will continue in their debt cycle. Please do not let someone you know fall victim to these pariahs. They are wolves in sheep’s clothing.

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